Multiple Choice
A distribution of assets to shareholders is referred to as a(n):
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12. Stockholders' Equity
Dividends and Dividend Preferences
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In the context of dividends and dividend preferences, guaranteeing future dividends is considered:
A
A common practice for all corporations
B
Not allowed under generally accepted accounting principles (GAAP)
C
A requirement for all preferred stockholders
D
An obligation only for common shareholders
Verified step by step guidance1
Understand the concept of dividends: Dividends are payments made by a corporation to its shareholders, typically as a distribution of profits. They can be issued in cash, stock, or other forms.
Learn about dividend preferences: Preferred stockholders often have priority over common stockholders when it comes to receiving dividends. However, this priority does not guarantee future dividends.
Review GAAP principles: Generally Accepted Accounting Principles (GAAP) prohibit guaranteeing future dividends because dividends are contingent on the corporation's financial performance and discretion of the board of directors.
Differentiate between preferred and common shareholders: Preferred shareholders may have a fixed dividend rate, but this does not equate to a guarantee. Common shareholders receive dividends only after preferred shareholders, and their dividends are not guaranteed either.
Conclude that guaranteeing future dividends is not allowed under GAAP, as it would conflict with the principle of financial uncertainty and the discretionary nature of dividend declarations.
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